What are the legal issues regarding social enterprise?

ocial enterprise is more of a political definition than a legal one. But for your own peace of mind and in the long-term interest of your organisation, it’s worth looking at the legalities surrounding the sector before starting up your business.

The general definition for social enterprise is a company which reinvests its profits for a social purpose as opposed to redistributing them. And for all the legal weight behind the term, the law sees it no differently. As far as the tax man is concerned, a standard social enterprise is not much more than an ordinary commercial business.

The government’s definition has it that a social enterprise is an organisation ‘with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners’. There is no legal definition.

But while social enterprise is not defined by any legal status, you can still adopt legal forms to protect both yourself and the social purpose of your business.

There’s a whole range of legal forms that you can adopt; which one you take up really depends on what it is you want from your social enterprise.

Popular forms include:

• a private company limited by shares
• a company limited by guarantee
• a limited liability partnership
• a community interest company
• a community benefit society
• a cooperative society
• a registered charity

All of these forms can be seen as making up a spectrum, going from the most similar to a commercial company to a traditional, donations-dependent charity – but it doesn’t quite work like that.

Abbie Rumbold of Bates Wells & Braithwaite, a firm which specialises in charity and social enterprise, explains: “A company limited by shares is probably the most closely linked to the commercial and a registered charity is at the other end. Something like a community interest company (CIC) kind of sits in the middle.”

However, it is not as straightforward as it sounds: “Actually, you can push it. You can make a community interest company – which has to re-invest some of its profit, but not all of it – distribute a proportion of its profits to its shareholders. So you might say that is more towards the commercial end.

“But then, you might say your community interest company is structured so that none of the profit is redistributed, that everything is for the community benefit.”

For the most part, legal form enables what you want to do with your company, rather than hinders. Once you know what you want to accomplish with your social enterprise, and how you will carry it out, choosing which form to take should be easy: with the variety of legal forms available, you should be able to find one that complements the requirements of your organisation quite easily.